Question 1

If MSC = 40.0 + 0.25Q, and MPC = 40.0 + 0.14Q, then production is associated with an externality specified as MEC = 40.0 + 0.36Q.

Accepted Answer

The correct calculation for MEC (Marginal External Cost) is the difference between MSC (Marginal Social Cost) and MPC (Marginal Private Cost), which is $0.25Q - 0.14Q = 0.11Q$, not $0.36Q$.

Question 2

A public good is characterized as possessing either nonrivalry in consumption or nonexcludable benefits.

Accepted Answer

A public good is characterized by both nonrivalry in consumption and nonexcludability in benefits, not either/or.

Question 3

Environmental pollution can be characterized as a market failure that distorts the classical market outcome.

Accepted Answer

Environmental pollution creates negative externalities which are not reflected in the market price. Companies producing goods or services that cause pollution do not bear the full cost of their actions, leading to an inefficient market outcome. Therefore, environmental pollution can be considered a market failure.

Question 4

The underlying assumptions of the Coase Theorem are that transactions are costless and that damages are accessible and can be measured.

Accepted Answer

The Coase Theorem assumes that in the presence of externalities, if property rights are clearly defined and transaction costs are negligible, parties will negotiate to correct the externality regardless of the initial allocation of rights. This implies that damages must be identifiable and measurable for the negotiation to take place effectively.

Question 5

If the market for a public good is comprised of two consumers, 1 and 2, who have individual demands of p1 = 100 - 0.2Q_D and p2 = 250 - 0.5Q_D, then the market demand function would be P = 350 - 0.7Q_D.

Accepted Answer

The market demand function is the sum of the individual demand functions. So, P = p1 + p2 = (100 - 0.2Q_D) + (250 - 0.5Q_D) = 350 - 0.7Q_D.

Question 6

At an efficient equilibrium, MSB = MSC, which implies that Mπ = MEC.

Accepted Answer

MSB (Marginal Social Benefit) is the additional benefit that society derives from an extra unit of production or consumption, while MSC (Marginal Social Cost) is the additional cost that society bears from an extra unit of production or consumption. When MSB = MSC, it means that the social benefits from the extra unit are equal to the social costs borne, and the equilibrium is efficient. This also implies that Mπ (Marginal Private Profit) is equal to MEC (Marginal External Cost), which means that the private benefits from the extra unit are equal to the costs imposed on others.

Question 7

Nonexcludability refers to the possibility that the benefits of consumption can be shared.

Accepted Answer

The answer of Nonexcludability refers to the possibility that the...

Question 8

According to the Coase Theorem, assignment of property rights will permit bargaining that leads to an efficient solution only in the absence of externalities.

Accepted Answer

According to the Coase Theorem, efficient solutions can be reached regardless of whether a situation involves externalities, as long as property rights are well-defined and transaction costs are low. However, the presence of externalities may affect the distribution of the gains from trade resulting from the bargaining process.

Question 9

At a competitive equilibrium, Mπ = 0, but at an efficient equilibrium MEC = 0.

Accepted Answer

At a competitive equilibrium, Mπ (marginal private benefit) equals the marginal private cost (MC), which implies that resources are allocated efficiently for the market transaction. However, it does not necessarily mean that the social cost or marginal external cost (MEC) is zero. On the other hand, at an efficient equilibrium, both MPC and MEC would be equal to zero, indicating an optimal allocation that takes into account all the social costs and benefits.

Question 10

Property rights are the set of valid claims to a good or resource that allow its use and the transfer of ownership through a sale.

Accepted Answer

Property rights refer to the legal claims and entitlements that individuals or entities have over a particular asset, allowing them to use, sell, or transfer ownership of that asset according to certain rules and regulations. Thus, property rights are essential for individuals to engage in productive and mutually beneficial economic activities, and they form the basis of many legal and institutional frameworks, such as contracts, patents, or copyright laws.

Question 11

If the third-party effects of a good generate benefits to a third party, it is a positive externality.

Accepted Answer

A positive externality occurs when the consumption or production of a good generates benefits to a third party.

Question 12

Nonrivalness means that one person's consumption does not preclude that of another.

Accepted Answer

Nonrival goods or services can be consumed or used by one person without reducing their availability for others to consume or use. Examples include digital music, a public park, or an open-source software program.

Question 13

The market demand for a public good such as environmental quality is found as the horizontal sum of all the individual demands for that good.

Accepted Answer

The market demand for a public good like environmental quality is found by vertically summing (not horizontally summing) all the individual demands for that good, because each individual's full willingness to pay for each unit of the good is added together at each quantity.

Question 14

The study conducted by Greenpeace China of the Pearl River Delta (PRD) region indicates that progress is being made to improve water quality.

Accepted Answer

The study conducted by Greenpeace China of the Pearl River Delta (PRD) region actually revealed significant pollution issues, indicating that water quality was still a major concern and not necessarily showing progress towards improvement.

Question 15

If property rights are held by the producer of an externality-generating good, then bargaining will continue as long as MEC > ρ > Mπ, where ρ represents the payment offered to the producer not to pollute.

Accepted Answer

This statement is true based on the Coase theorem, which suggests that if property rights are clearly defined and transaction costs are low, then bargaining between the parties involved will result in an efficient outcome. In this case, MEC represents the marginal external cost (the cost imposed on others by the pollution), ρ represents the payment offered to the producer not to pollute (the compensation for the cost of reducing emissions), and Mπ represents the marginal private cost (the cost incurred by the producer to reduce pollution). As long as the payment offered is higher than the private cost but lower than the external cost, both parties have an incentive to reach an agreement that benefits them both.

Question 16

If recreational users of a natural resource hold the property rights to that resource, their bargaining stance with the producer of an externality-generating good who wants to use that resource is that they will accept a payment ρ as long as ρ < (MSC - MSB).

Accepted Answer

The correct condition for recreational users to accept a payment ρ is when ρ > (MSC - MSB), where MSC is the marginal social cost and MSB is the marginal social benefit. This is because the payment needs to compensate for the external costs imposed on them, which are above the marginal social benefits they receive.

Question 17

If property rights for resources are shared, those resources are called common property resources.

Accepted Answer

When the property rights for resources are shared, they are referred to as common property resources.

Question 18

According to the textbook application, CD packaging is a negative production externality.

Accepted Answer

CD packaging is not a negative production externality itself; it refers to the physical material used to encase CDs. A negative production externality would be an adverse effect on a third party not involved in the production or consumption of a good, such as pollution from manufacturing the packaging, not the packaging itself.

Question 19

If we define the relevant market as "environmental quality," then the market failure is due to the presence of a negative externality.

Accepted Answer

The answer of If we define the relevant market as...

Question 20

If market is defined as a good or service whose production or consumption generates environmental damage, then the market failure is due to a negative externality.

Accepted Answer

This statement is true as a negative externality occurs when the cost of producing or consuming a good or service is borne by someone other than the producer or consumer, resulting in a market failure. Environmental damage is one example of a negative externality.

Quiz 3: Modeling Market Failure